Brad Thomas currently writes weekly for Forbes.com and Seeking Alpha where he maintains “real time” REIT research on many publicly-listed REITs. In addition, Thomas is the editor of Forbes Real Estate Investor, a monthly subscription-based newsletter. Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, and Fox Business. He was ranked as the #1 analyst on Seeking Alpha in 2014 and he is currently writing a book on the legendary investor Donald Trump. Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College where he played basketball. He resides in South Carolina with his wife and kids.

Intelligent REIT Investing: Dividends Are More than Just Icing on the Cake

A few weeks back I was reading an article on Seeking Alpha by Charles (Chuck) C. Carnevale, the creator of F.A.S.T. Graphs™, and in the article, Dividends Provide A Return Bonus, Carnevale wrote:

With all things being equal, dividend paying common stocks provide their shareholders a return bonus, or what some might like to call a kicker, over an equivalent common stock that pays no dividend. Many investors do not see it this way, as they tend to think of the dividend providing them their return. However, the stock market capitalizes earnings whether a company pays a dividend or not. Moreover, we contend that the market will value a given company’s earnings based on their past and future prospects for growth, again, regardless of whether a dividend is paid or not.

Carnevale went on to write about the concept of total return investing as he explains,

An investment in a common stock typically offers their shareholders two components of return. The first component is the capital appreciation component or the increase (or decrease) in the stock’s value over time. The second component is the dividend, or lack thereof, that the company pays to shareholders in cash, typically once a quarter. The two added together equal the shareholders’ total return. On the one side, we have the capital growth component and on the other side the income component.

The important point behind Carnevale’s article was that when comparing two companies with equivalent rates of earnings – one paying a dividend and the other not paying – the dividend paying company will pay their shareholder a higher total return. In other words of Carnevale,

The stock that pays a dividend to its shareholders is providing them a return bonus or kicker.

Carnevale went on to write that in either case, dividend paying or not, the bulk, or majority, of total return will be provided by the capital appreciation component. Accordingly, Carnevale proclaims that “this is why we are saying that dividends are a kicker or bonus return. In other words, capital appreciation is the cake and dividends (if any) are the icing.”

As a fellow Seeking Alpha writer (I also contribute regularly for Forbes.com), I have gotten to know Mr. Carnevale and I consider him one of the best writers on Seeking Alpha. His explanation of total returns – using the cake and icing analogy – is perhaps one of the best ever and he has demonstrated his true value and experience in providing his readers and investors with significant insight into the realm of intelligent investing.

Of course, I pointed out to Mr. Carnevale that most REIT dividends paid are more than 50 percent of their total return composition. Accordingly, since REITs payout over 90 percent of annual income in the form of dividends, there is a more structured and disciplinary approach that makes REITs unique and also very rewarding for investors.

It is interesting to note that Ben Graham published The Intelligent Investor in 1949 and then he did not know that REITs would be a significant contribution to value investing. For it was around 11 years later, in 1960, that President Eisenhower signed a law, the REIT Act, that was contained in the Cigar Excise Tax Extension.

Mr. Graham would have likely become a big fan of REITs as the disciplinary approach to REIT investing makes it possible to anchor a portfolio with repeatable dividend income. Graham explains his approach to dividend investing in The Intelligent Investor:

Paying out a dividend does not guarantee great results, but it does improve the return of the typical stock by yanking at least some cash out of the manager’s hands before they can squander it or squirrel it away.

The concept of REIT investing is rooted in the same “cake and icing” blueprint that Mr. Carnevale wrote; however, the two elements (dividends and capital growth) are reversed for REITs making dividends the “cake” and capital appreciation the “icing”. Furthermore, REITs help to balance the conventional common stock portfolio by reducing volatility and by providing a natural hedge against inflation.

REIT dividend yields have historically been a good deal higher than the average yield of the S&P 500 Index. Conversely, dividends make a difference for long-term retirement savings and they can be reinvested to generate future returns, while in later years they can provide a steady income stream to help meet expenses in retirement.

Some of the most reliable stocks are equity REITs – especially the ones that have enjoyed an extraordinary track record of not only maintaining dividends, but also growing them. The elite group of “anchor” REITs are part of a larger group of public companies that are often referred to as Dividend Champions and Dividend Contenders. [Seeking Alpha contributing writer David Fish produces this "US Dividend Champion" report on his DRiP Investing Resource Center site.]

Because REITs pay consistent dividends, they are more than just icing on the cake. Instead, they provide a value proposition like no other stock and perhaps that is why the “cake and eat it too” strategy is appetizing to many intelligent REIT investors. For Ben Graham must’ve loved the attraction to dividends when he wrote,

One of the most persuasive tests of high-quality is an uninterrupted record of dividend payments going back over many years…

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